BG’s Egypt assets fit with Shell’s long-term bet

Shell’s $70 billion takeover of BG Group is likely to be good news for BG’s troubled assets in Egypt, analysts and industry figures say, despite suggestions the new owner has a cool attitude towards the region.

When announcing the takeover, Shell said it was planning $30 billion of asset sales from 2016 onwards and did not include any of its current or future Middle Eastern businesses in plans for where it wanted to focus its attention next.

However, BG’s offshore fields and little-used LNG plant are far more attractive to Shell than they might look, said Magdi Nasrallah, petroleum chair at the American University of Cairo, as they fit well within the company’s desire to invest more in LNG and deepwater exploration.

Shell is not wholly ignorant of the potential of the East Mediterranean sea, having explored the Egyptian North East Mediterranean Deepwater concession in the 1990s, which is located close to Israel’s gas fields.

BG pledged in March to invest $4 billion into Phase 9a of the offshore West Delta Deep Marine concession. But the company is still owed $920 million by the Egyptian government, and posted a record quarterly loss of $5.03 billion following a $5.94 billion after-tax writedown of its Australian and Egyptian assets in the same month.

Ahmed Moaaz, a former Egyptian General Petroleum Corp. official and country manager of Sea Dragon Energy, believes Shell has the financial muscle to follow through on BG’s commitments as well as make the continuous extra investment the concessions need.

“Shell in general is good. They’re here to stay for some time,” Moaaz told Interfax. “I believe that by buying BG [they are making a commitment] that they will invest more money.”

He added that, although Shell has closed its downstream businesses throughout North Africa, it shows no sign of selling out of its Western Desert assets in Egypt – especially as it signed the country’s first shale gas exploration contract with Apache in December.

Uncertain future

However, the future of the Idku LNG plant is still uncertain. It is running at minimum capacity and produced only five cargoes last year compared with 50 in 2013, with no firm signs of extra gas becoming available for export in the near future.

There is speculation that Egypt’s LNG imports, which bring in 14.2 million cubic metres (MMcm) of gas per day, might free up some of BG’s supplies that are being diverted into the local market.

But with a supply gap of 19 MMcm/d and heavy industrial users – such as cement and fertiliser companies – complaining of virtual shutdowns even over winter, it is unlikely the extra supply will allow BG to take back much of its gas quota.

Other issues include the deal with BP to provide access to BG’s extensive network of submarine gas infrastructure – but for a fee rather than gas-in-kind to feed the Idku plant – and BG’s talks with the owners of Israel’s offshore Leviathan gas field.

BG signed a letter of intent in June last year with United States-based Noble Energy and Israeli producer Delek Group for 7 billion cubic metres of gas a year for 15 years, at a yet-to-be-determined price.

Avoiding Israel

But based on Shell’s history since 1958 of avoiding Israel to placate its Arab partners, and potential increased investment in offshore fields within Egypt, that deal may fall through, said an Israeli consultant who preferred not to be named.

“For Shell, Israel is a no-no,” he said. “Any direct involvement of Shell in Israel… was not considered positive at all.” He also speculated that Shell could “hide” behind BG’s name if it wanted to push forward with the deal, or fall back on semantics and claim any sales would be from American company Noble rather than Israel.

Yet Chatham House researcher David Butter does not think the geopolitical considerations will cause a problem.

“I don’t really buy this stuff about Shell ‘boycotting’ [Israel]. That may be some sort of historical legacy from the old Arab boycott era, when Syria was an important part of Shell’s regional business and long before Israel’s emergence as the Qatar of the East Med,” he told Interfax.

“Any deal on Leviathan would, as I understand it, involve ELNG on the Egyptian side, in which the BG legacy stake is 38%,” Butter added.

Source: Interfax